Why Investors Need to Embrace Market Volatility

In mid-September this year, the SPDR STI ETF (SGX: ES3), a proxy for the Straits Times Index (SGX: ^STI), had declined for five straight weeks, from 3,346 points on 12 September to 3,168 points on 17 October. It was a decrease of some 5%.

According to Bloomberg, around S$29.4 billion in market capitalisation was wiped off the market. This was more than the Gross Domestic Product of our neighbouring countries of Brunei or Cambodia.

Market Volatility – Your Enemy?  

It may seem scary that investors had to go through such volatility. However, volatility and the stock market go hand-in-hand just like how Nutella goes well with bread. In fact, more than 10% declines in the index are quite common.

In his article, my fellow colleague, Ser Jing, noted the following:

“I took historical data of the STI from Yahoo Finance and looked at the percentage declines in each calendar year from the index’s annual-peak to its subsequent-trough. Turns out, in 25 full calendar-years, the STI has declined from its annual-peak to its subsequent-trough by more than 20% in eight separate years. That’s almost one-third of the time and yet market participants anecdotally find out that their stomachs start churning even at 10% pullbacks!”

So, as investors, what are we to do? Like they say, if we can’t beat them, we have to join them. In that sense, we just have to make market volatility our friend.

When fear prevails, logic is thrown out of the window. Therefore, when the market throws a tantrum, some stocks will start trading below its intrinsic value. If we can identify those stocks, provided they are fundamentally sound in the first place, we can grab the opportunity and buy those stocks to hold for the long-term. If the stocks we already own are underwater, we can look into buying more of them. Who wouldn’t like a sale?

In The Sunday Times just last weekend, reporter Goh Eng Yeow wrote that while he was holidaying in Japan last month, his friends were fretting over the paper losses in their portfolios. However, he, on the other hand, was unflustered, enjoying the “different shades of gorgeous yellow, orange and red” that the autumn season brought about. He knew that the market always does its thing and the only way to play the cards is to let the market do its thing. As a long-term investor, these short-term fluctuations are negligible.

Mother of All Volatility

During the 2007-2009 sub-prime crisis, when the STI plunged more than 60%, some of the rarest opportunities were given to market watchers on a silver platter. Companies such as Raffles Medical Group Ltd. (SGX: R01), Sarine Technologies Ltd (SGX: U77) and Silverlake Axis Ltd (SGX: 5CP) had plunged more than the index from their respective peaks in 2007. Now, they are all trading at much higher prices than their peaks. Investors who had the stomach to invest then would be sitting on truckloads of gains now, not to mention the dividends they would have amassed while waiting.

Foolish Bottomline

The father of value investing, Benjamin Graham, once had this to say: “In the short term, the stock market behaves like a voting machine, but in the long run, it is a weighing machine.”

It doesn’t matter what the market is doing during the short-term. In the long run, the true value of the company will be reached, provided it is fundamentally sound. Some of the best opportunities to invest are actually thrown up during huge market volatility. The question is, are you ready to take the bull by the horns?

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Sudhan P doesn’t own shares in any companies mentioned.